Public Information Notice: IMF Discusses Liberia's Post-Conflict Conditions and Economic Program for 2004/05
IMF News, December 3, 2004
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- Published: December 3, 2004
Background
- Peace agreement signed in August 2003 ended fifteen years of intermittent civil wars.
- Two-year transitional government established with mandate to rebuild institutional capacity and prepare for elections in October 2005.
- Security improvements: deployment of 15,000 UN peace-keepers and demobilization of 65,000 combatants.
- Post-2003 recovery supported by donor assistance and related manufacturing and services activities.
Macroeconomic performance and projections
- Real GDP developments:
- Following severe contraction in the second half of 2003, the economy started to recover.
- Real GDP is projected to increase by about 21 percent in the second half of 2004, compared to the second half of 2003.
- Expected to expand further, although at a slower pace, in the first half of 2005, driven by increasing donor support and a partial recovery of agriculture activities.
- Price developments:
- Consumer prices (annual average) reported as: 12.1, 14.2, 15.0, ..., 5.0 (for the listed periods).
- Exchange rate:
- Official exchange rate (Liberian dollar per U.S. dollar; end of period) listed as: 49.5, 65.0, 50.0.
Fiscal and monetary developments
- Fiscal execution and policy:
- A basic economic program for the first half of 2004 was successfully implemented.
- A cash-based budget was executed, without recourse to domestic financing.
- Revenue-enhancing measures boosted revenue; some steps taken to strengthen the budget process, including expenditure controls.
- For 2004/05, the budget continues to be cash-based, without recourse to domestic financing.
- Spending plans geared toward social projects, reestablishment of security and the justice system, and some repayments of domestic arrears.
- Monetary operations and banking system:
- The Central Bank of Liberia (CBL) accommodated increased demand for local currency without affecting the exchange rate; reserves recovered modestly.
- First steps toward a more transparent and market-based framework for banking operations included introduction of foreign exchange auctions and removal of ceilings on lending rates.
- Scope for monetary policy constrained by high degree of dollarization; authorities intend to further develop instruments of monetary policy to be utilized as demand for local currency increases.
- Recent slippages and risks:
- Emergence of domestically financed budgetary deficits and measures that led to higher expenses at the CBL have put undue pressures on the financial position of the banking system.
- Recent slippages in the fiscal and monetary areas noted as a concern; IMF is working with the authorities on a package of corrective measures.
- Liberia has been in continuous arrears to the Fund since 1984; declaration of noncooperation issued in 1986; voting and related rights suspended in March 2003.
- At end-July 2004, Liberia's arrears to the Fund amounted to SDR 506 million or 709 percent of quota.
Governance, structural reforms, and external relations
- Petroleum and timber:
- Authorities intend to implement final steps to liberalize petroleum product imports, with technical support from the World Bank.
- Working with external partners on measures that could lead to lifting of sanctions on timber exports.
- Institutional agenda:
- Focused agenda to reestablish a transparent budget process; accountable revenue-generating agencies; and a market-based and transparent framework for the operations of the CBL and banking system.
- Technical assistance from the Fund expected to continue, in particular to improve statistical reporting.
Executive Board assessment — Findings
- Directors welcomed improvements in security and the incipient economic recovery.
- Commended successful implementation of the basic economic program for the first half of 2004 based on a cash-based budget without recourse to domestic financing.
- Welcomed steps to improve the budget process and CBL operating framework, including foreign exchange auctions and removal of ceilings on lending interest rates.
- Regretted slippages since June 2004 caused by additional spending and reemergence of a cash deficit financed domestically.
- Noted high degree of dollarization limiting scope of monetary policy.
- Noted recent slippages in financial management of the CBL and irregularities in accounting of official reserves and data provided to the Fund as a setback; welcomed immediate corrective steps taken by authorities.
Executive Board assessment — Policy recommendations and conditions
- Fiscal policy and public finance:
- Maintain a cash-based budget to foster fiscal discipline.
- Make expenditure controls fully effective; Cash Management Committee should implement policies consistently to prevent circumvention of agreed procedures.
- Develop an equitable strategy for settlement of domestic arrears, balancing treatment of domestic and external arrears.
- Strongly caution against resorting to domestic borrowing given arrears and financial fragility of the CBL and domestic banking system.
- Monetary policy and financial sector:
- Develop monetary policy instruments with external assistance to expand policy scope as demand for local currency increases.
- CBL should redouble efforts to strengthen its financial position and lay the ground for effective banking supervision in anticipation of financial sector recovery.
- Governance and external cooperation:
- Continue close cooperation with the Fund on corrective measures and ensure full and timely implementation of understandings reached with staff.
- Emphasized importance of close cooperation with external partners and development of concrete and time-bound action plans to support the reform agenda.
- Supported request for technical assistance from the Fund, particularly to improve statistical reporting.
- Remedial measures and Fund relations:
- Directors expressed willingness to consider initiation of de-escalation of remedial measures related to Liberia's overdue financial obligations to the Fund once steps to reverse recent policy slippages are fully implemented and understandings on a staff-monitored program for 2005 are reached.
- A number of Directors expected the authorities to consider increasing monthly payments to the Fund as the international reserves position improves.
Selected economic and financial indicators (selected figures from table)
- Real GDP (annual percentage change, unless otherwise indicated): 4.9; 3.3; -29.5; 23.1; 20.5.
- Consumer prices (annual average): 12.1; 14.2; 15.0; ...; 5.0.
- Central government operations (In percent of GDP, calendar year):
- Total revenue and grants: 13.0; 12.9; 10.8; 16.1; 13.7.
- Of which: tax revenue: 11.4; 12.5; 9.5.
- Total expenditure and net lending: 10.2; 17.2.
- Of which: current expenditure: 7.6; 4.6; 5.5.
- Capital expenditure: 6.1; 9.6.
- Overall fiscal balance (cash basis): -0.7; -1.3; 0.7; -1.1; 0.
- External sector (In percent of GDP):
- Current account balance, including grants (deficit, -): -20.3; -7.6; -12.3; -9.0.
- Of which: public interest payments due: -12.7; -8.0; -10.1; -13.5; -11.2; -26.3; -8.7; -12.0; -24.7; -18.7.
- Trade balance (deficit, -): -2.7; -11.4; -70.1; -62.9.
- Exports, f.o.b.: 23.9; 29.6; 21.4; 9.4; 8.3.
- Imports, c.i.f.: -36.3; -32.3; -79.6; -71.2.
- Public sector external debt outstanding (total): 455.3; 476.8; 613.3; 640.9; 588.8.
- Selected monetary and nominal levels (In millions of U.S. dollars, unless otherwise indicated):
- Current account balance including grants (deficit, -): -198.5; -6.1; -33.4; -26.5; -23.3; -65.9; -15.3; -50.4; -150.6; -163.3.
- Nominal GDP: 534.4; 561.8; 442.2; 214.8; 259.8.
- Official exchange rate (Liberian dollar per U.S. dollar; end of period): 49.5; 65.0; 50.0.
Public Information Notice: IMF Discusses Liberia's Post-Conflict Conditions and Economic Program for 2004/05 — December 3, 2004